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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

You are scheduled to receive $20,000 in two years. When you receive it, you will invest it for six more years at 6.8 percent per year. How much will you have in eight years?
You have just made your first $5,500 contribution to your retirement account. Assuming you earn a return of 10 percent per year and make no additional contributions, what will your account be worth
Suppose you are still committed to owning a $245,000 Ferrari (see Problem 9). If you believe your mutual fund can achieve an annual rate of return of 11.2 percent and you want to buy the car in 9
Refer back to the Series EE savings bonds we discussed at the very beginning of the chapter.a. Assuming you purchased a $50 face value bond, what is the exact rate of return you would earn if you
In 1895, the first U.S. Open Golf Championship was held. The winner’s prize money was $150. In 2016, the winner’s check was $1,800,000. What was the percentage increase per year in the winner’s
Your coin collection contains fifty 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2067,
You have just received notification that you have won the $2 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you’re around to
Imprudential, Inc., has an unfunded pension liability of $415 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back
You’re trying to save to buy a new $245,000 Ferrari. You have $50,000 today that can be invested at your bank. The bank pays 4.3 percent annual interest on its accounts. How long will it be before
According to the Census Bureau, in October 2016, the average house price in the United States was $354,900. In October 2000, the average price was $215,100. What was the annual increase in the price
At 6.1 percent interest, how long does it take to double your money? To quadruple it?
Assume the total cost of a college education will be $345,000 when your child enters college in 18 years. You presently have $73,000 to invest. What annual rate of interest must you earn on your
Solve for the unknown number of years in each of the following: Present Value Future Value $ 1,389 1,821 289,715 Years Interest Rate 560 7% 8 810 18,400 11 430,258 21,500
Solve for the unknown interest rate in each of the following: Present Value Interest Rate Future Value 317 1,080 185,382 531,618 Years 181 335 17 13 48,000 40,353 30
For each of the following, compute the present value: Interest Rate Present Value Future Value $ 16,832 Years 13 4 29 9% 48,318 886,073 13 21 40 550,164
For each of the following, compute the future value: Future Value Present Value $ 2,328 7,513 74,381 Interest Rate Years 11 13% 14 12 16 192,050
First City Bank pays 9 percent simple interest on its savings account balances, whereas Second City Bank pays 9 percent interest compounded annually. If you made a deposit of $7,500 in each bank, how
1. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean?2. S&S Air is planning for a growth rate of 12 percent next year. Calculate the EFN
Sig, Inc., wishes to maintain a growth rate of 12 percent per year and a debt-equity ratio of .43. The profit margin is 5.9 percent, and the ratio of total assets to sales is constant at 1.80. Is
Gilmore, Inc., had equity of $145,000 at the beginning of the year. At the end of the year, the company had total assets of $210,000. During the year, the company sold no new equity. Net income for
You’ve collected the following information about Molino, Inc.:Sales = $215,000Net income = $17,300Dividends =
Based on the following information, calculate the sustainable growth rate for Hendrix Guitars, Inc.:Profit margin = 6.3%Total asset turnover = 1.75Total
A firm wishes to maintain an internal growth rate of 7.1 percent and a dividend payout ratio of 25 percent. The current profit margin is 6.5 percent, and the firm uses no external financing
Ramble On Co. wishes to maintain a growth rate of 12 percent per year, a debt-equity ratio of .90, and a dividend payout ratio of 25 percent. The ratio of total assets to sales is constant at .85.
For the company in Problem 16, suppose fixed assets are $520,000 and sales are projected to grow to $790,000. How much in new fixed assets are required to support this growth in sales? Assume the
Hodgkiss Mfg., Inc., is currently operating at only 91 percent of fixed asset capacity. Current sales are $715,000. How fast can sales grow before any new fixed assets are needed?
Assuming the following ratios are constant, what is the sustainable growth rate?Total asset turnover = 2.90Profit margin = 5.2%Equity multiplier
Based on the following information, calculate the sustainable growth rate for Kaleb’s Heavy Equipment:Profit margin = 7.3%Capital intensity
If Synyster Corp. has an ROE of 14.7 percent and a payout ratio of 30 percent, what is its sustainable growth rate?
If A7X Co. has an ROA of 7.6 percent and a payout ratio of 25 percent, what is its internal growth rate?
Consider the following income statement for the Heir Jordan Corporation:A 20 percent growth rate in sales is projected. Prepare a pro forma income statement assuming costs vary with sales and the
The most recent financial statements for Alexander Co. are shown here:Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant
For the company in Problem 6, what is the sustainable growth rate?The most recent financial statements for Bello Co. are shown here: Balance Sheet Income statement $18,900 Current assets 12,800
The most recent financial statements for Bello Co. are shown here:Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout
The most recent financial statements for Assouad, Inc., are shown here:Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a
The most recent financial statements for Cardinal, Inc., are shown here:Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,100 was paid, and the company wishes to
The most recent financial statements for Kerch, Inc., are shown here (assuming no income taxes):Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next
In Question 1, assume the company pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not. Prepare the pro forma statements and
Consider the following simplified financial statements for the Wims Corporation (assuming no income taxes):The company has predicted a sales increase of 15 percent. It has predicted that every item
Alicia Inc. has a $100 face value convertible bond issue that is currently selling in the market for $96. Each bond is exchangeable at any time for 20 shares of the company’s stock. The
Which of the following two sets of relationships, at time of issuance of convertible bonds, is more typical? Why? A B Offering price of bond Bond value (straight debt) Conversion value $ 80 $100 95
Suppose a share of stock sells for $54. The risk-free rate is 5 percent, and the stock price in one year will be either $60 or $70.a. What is the value of a call option with a $60 exercise price?b.
We are examining a new project. We expect to sell 6,500 units per year at $63 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $63 ×
Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $310,000 per year. You believe the technology used in the machine has a 10-year life; in other
A bond with 20 detachable warrants has just been offered for sale at $100. The bond matures in 25 years and has an annual coupon of $5.5. Each warrant gives the owner the right to purchase two shares
You have been hired to value a new 30-year callable, convertible bond. The bond has a 7.5 percent coupon, payable annually, and its face value is $100. The conversion price is $5.5 and the stock
A $100 par convertible debenture has a conversion price for common stock of $28 per share. With the common stock selling at $37, what is the conversion value of the bond?
Buckeye Industries has a bond issue with a face value of $100 that is coming due in one year. The value of Buckeye’s assets is currently $109. Jim Tressell, the CEO, believes that the assets in
Rackin Pinion Corporation’s assets are currently worth $104. In one year, they will be worth either $100 or $129. The risk-free interest rate is 5 percent. Suppose Rackin Pinion has an outstanding
A one-year call option contract on Cheesy Poofs Co. stock sells for $1,150. In one year, the stock will be worth $47 or $68 per share. The exercise price on the call option is $60. What is the
The price of Tara Inc. stock will be either $64 or $86 at the end of the year. Call options are available with one year to expiration. T bills currently yield 6 percent.a. Suppose the current price
The price of Newgen Corp. stock will be either $53 or $84 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent.a. Suppose the current
Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $27.a. Suppose you buy 10 contracts of the February 28 call option. How much will
Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $84.a. Are the call options in the money? What is the intrinsic value of an RWJ
The exchange rate for the Australian dollar is currently AUD1.15. This exchange rate is expected to rise by 10 percent over the next year.a. Is the Australian dollar expected to get stronger or
Suppose the rate of inflation in the European Union will run about 3 percent higher than the Canadian inflation rate over the next several years. All other things being the same, what will happen to
The owners’ equity accounts for Okanagan International are shown here:Common stock ($1 par value) ....................... $ 20,000Capital Surplus ................................................
Faced with new competition from Samsung Galaxy Tabs, Apple Inc. releases a new iPad, which has a faster processor and better features, on Monday at 11 am. What do you expect would happen to the stock
Jenna Simpson, a retired investment advisor from Regina, conducted a research on Baux Inc., an aluminum mining company from Saskatchewan. She found out that the company’s stock price would suffer
Lucy Smith was in a dilemma to choose between two stocks: Telus Communications (listed on the TSX) and Seair Inc. (listed on the TSX Venture Exchange). On the Internet, she was able to find a large
Matthew and Stephen Fleming are experienced wealth managers in Manitoba. On August 20, 2012, Matthew and Stephen bought 200 shares of Steinbach Gold Inc. and Selkirk Technology Limited. On August 21,
Sharon Nicol, an employee of IMAX Corporation holds 800 shares of her company stock. She thinks the company had a huge growing potential and decides not to sell any of the IMAX shares in her
Jack Sparrow, a Vancouver based techie, had a fascination for Facebook Inc. shares. He bought 200 shares of Facebook during the IPO for $38 on May 18, 2012. During August 2012, the share price fell
Forest Gump, a hockey player from Edmonton, holds two types of accounts—a risky and a retirement account. He purchases Greek and Spanish bonds for his risky account and invests in Bank of Montreal
Pamela Landry, a novice investor from Montreal, bought 2,000 shares of Research In Motion (RIM) stock during August 2012. During this period, RIM reported a loss of $518 million in revenues from the
John Cutter has owned a home in Toronto for the past 45 years. He is thinking of downsizing by selling his house and moving to a rental apartment for his retirement. John observes that housing prices
Suppose that, in the previous problem, Childs is considering two mutually exclusive investments. Project A has an NPV of $135, and Project B has an NPV of $215. As a result of taking Project A, the
Childs Manufacturing has a discount bank loan that matures in one year and requires the firm to pay $2,950. Th e current market value of the firm’s assets is $3,400. The annual variance for the
Calculate the Black–Scholes option price in each of the cases that follow. The risk-free rate and standard deviation are quoted in annual terms. The last three cases may require some thought.Round
You have been hired to value a new 25-year callable, convertible bond. The bond has a 4.8 percent coupon, payable annually. The conversion price is $9, and the stock currently sells for $3.21. The
In calculating an insurance premium, the actuarially fair insurance premium is the premium that results in a zero NPV for both the insured and the insurer. As such, the present value of the expected
You are assigned to the risk management department of Torbram Wheels Inc., a Canadian chain of auto service shops with outlets in North America and internationally. Your office is located in
Suppose your company has a building worth $450 million. Because it is located in a high-risk area for natural disasters, the probability of a total loss in any particular year is 1.5 percent. What is
Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $83 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise
Refer to Figure 24.11 in the text to answer this question. Suppose you purchase an August 2012 call option on crude oil futures with a strike price of 8500 cents per barrel. How much does your
The sub-prime crisis demonstrated the enormous social costs arising from the misuse of financial engineering. What do you think caused this misuse? How can it be prevented in the future?
Looking back at the Telus example we used to open the chapter, why would you say Telus used swap cross-curreny agreements? In other words, why didn’t Telus just go ahead and issue say,
Bubbling Crude Corporation, a large Alberta oil producer, would like to hedge against adverse movements in the price of oil, since this is the firm’s primary source of revenue. What should the firm
Blenheim PLC has a market value of $125 million and 5 million shares outstanding. Howard Department Store has a market value of $40 million and 2 million shares outstanding. Blenheim is contemplating
Raleigh Couriers is analyzing the possible acquisition of Harwich Restaurants. Neither firm has debt. The forecasts of Raleigh show that the purchase would increase its annual after-tax cash flow by
Chatham Foods, which has 1 million shares outstanding, wishes to merge with Kent Drinks with 2.5 million shares outstanding. The market prices for Chatham Foods and Kent Drinks are $49 and $18 per
The shareholders of Tilbury Company have voted in favour of a buyout offer from Dover Corporation. Information about each firm is given here:Tilbury’s shareholders will receive one share of Dover
Wheatley Corp. is analyzing the possible acquisition of Romney Company. Both firms have no debt. Wheatley believes the acquisition will increase its total after-tax annual cash flows by $2 million
In the previous problem, construct the statement of financial position for the new corporation assuming that the transaction is treated as a purchase for accounting purposes. The market value of
Knapps Enterprises has acquired Leamington Corp. in a merger transaction. Construct the statement of financial positionfor the new corporation if the merger is treated as a pooling of interests for
In the previous problem, suppose the fair market value of Essex’s fixed assets is $9,300 versus the $6,400 book value shown. Amherst pays $16,000 for Essex and raises the needed funds through an
Assume that the following statements of financial position are stated and a book value. Construct a post-merger statement of financial position assuming that Amherst Co. purchases Essex Inc. and the
Consider the following pre-merger information about Firm X and Firm Y:Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $6 per share. Assuming
Tecumseh Inc. is analyzing the possible merger with Devonshire Inc. Savings from the merger are estimated to be a one-time after-tax benefit of $120 million. Devonshire Inc. has 4 million shares
Roseland Inc. has offered $417 million cash for all of the common stock in Forest Glade Corporation. Based on recent market information, Forest Glade is worth $376 million as an independent
What is the difference between an equity carve-out and a spin-off? Why would a corporation choose to do one over the other? Describe a situation where an equity carve-out would be more advantageous
In January 1996, Dun and Bradstreet Corp. announced plans to split into three entities: an information services core to include Moody’s credit-rating agencies, a company that would include the
An asset costs $675,000. The CCA rate for this asset is 25 percent. The asset’s useful life is two years after which it will be worth $50,000. The corporate tax rate on ordinary income is 35
1. What are the pros and cons of the international sales? What additional risks will the company face?2. What happens to the company’s profits if the dollar strengthens? What if the dollar
Gumtako International has operations in Arrakis. The statement of financial position for this division in Arrakeen solaris shows assets of 27,000 solaris, debt in the amount of 11,000 solaris, and
Gorbochevsky Equipment has an investment opportunity in Europe. The project costs EUR 12 million and is expected to produce cash flows of EUR 1.8 million in year 1, EUR 2.6 million in year 2, and EUR
Suppose the spot exchange rate for the Hungarian forint is HUF 204.32. The inflation rate in Canada will be 1.9 percent per year. It will be 4.5 percent in Hungary. What do you predict the exchange
Suppose the spot and three-month forward rates for the yen are ¥79.12 and ¥78.64, respectively.a. Is the yen expected to get stronger or weaker?b. What would you estimate is the difference between
You observe that the inflation rate in Canada is 2.6 percent per year and that T-bills currently yield 3.4 percent annually. What do you estimate the inflation rate to be in:a. Australia, if
Suppose the spot and six-month forward rates on the Norwegian krone are NOK 5.78 and NOK 5.86, respectively. The annual risk-free rate in Canada is 3.8 percent, and the annual risk-free rate in

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